It's the downtrend in gold that was transitory
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
While the head of the Federal Reserve Bank and its governors continue to insist recent skyrocketing inflation in everything from lumber to hamburger being "transitory", gold has become the safe-haven of choice during a volatile week in the marketplace.
On Wednesday, the cryptocurrency sector was rocked by China announcing it has banned financial institutions and payment companies from providing services related to cryptocurrency transactions, and warned investors against speculative crypto trading. This news came on the heels of last week's SEC warning of bitcoin speculation being "highly speculative" and volatile, and that everyone should be aware of the risks involved.
Bitcoin saw its tenth daily drop in the past two weeks of trading and the cryptocurrency was down roughly 40% from its high of nearly $65,000 just last month. At one point during the meltdown on Wednesday, nearly $1 trillion was wiped off the cryptocurrency's market capitalization.
Furthermore, stocks and commodities plunged right along with the cryptocurrency complex on the news, as investors dumped speculative assets to rotate safe-haven capital into gold. After seeing bitcoin eating gold's lunch as an inflation hedge over the past few months, it was fitting to see the crypto crash being the catalyst to take the gold price back above its 200-day moving average and its nearly 10-month downtrend line at $1850.
But volatility increased as the safe-haven metal lost much of its gains and quickly re-tested its 200-day moving average after somewhat hawkish news coming later in the day from the release of FOMC minutes of the April meeting. "A number of participants suggested that if the economy continued to make rapid progress toward the (policy-setting) Committee's goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases," the minutes said in the most overt reference yet to possible changes to the Fed's bond purchases and extended Dot Plot of ultra-low interest rates.
However, the weakness was bought rather quickly as the gold price booked its 6th consecutive day of gains on Thursday to reach a 4-month high. More importantly, these gains have come on the back of the Gold/TLT ratio breaking out to 6-year highs, while gold has become the safe-haven choice vs bonds since the beginning of the year.
Meanwhile, the gold miners have been outperforming gold since the beginning of March. The low in GDX was struck two weeks before gold ended its 20% correction from an August 2020 all-time high of $2089. In mid-April, the GDX broke out of its correctional downtrend one month ahead of gold breaking out of its respective multi-month downtrend this week, with outflows in the major miner ETF since January having also reversed course.
Moreover, as mentioned in the space last week, with the gold price on its way to a weekly close above $1850, the juniors have begun to outperform the miners. I expect sector investment capital has already begun to be rotated out of the majors and into undervalued juniors, while the GDXJ/GDX ratio may have struck its low last Friday.
Over the past month or so, I've been pointing out several reasons why the precious metals sector is on the verge of breaking out. But before continuing to do so, a buying opportunity may take place next week with bullion becoming short-term overbought. This morning, the daily RSI in gold futures is moving above 75 as the gold price continues its climb towards $1900 hinting a routine downside correction may take place soon.
If you have not already done so, next week may be a good time to position yourself in quality juniors as I expect weakness to be bought during this new up-leg of the secular bull market in gold. After the GDXJ tested its 7-year breakout line of support at $45 at the end of March, the technical upside target of $90 in the junior miner ETF could be reached by the end of the year.
During the past few weeks, I have deployed the rest of my cash in the $1M real-money Junior Miner Junky (JMJ) portfolio. Before taking a position in a well-researched junior on the JMJ Watch List, subscribers are sent a detailed report on the company the day before I plan to purchase shares in the open market to establish a long-term holding position.
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